Stakeholders Justify CBN’s Retention of Monetary Rates

As key decisions reached at the 259th meeting of the Monetary Policy Committee of the Central Bank of Nigeria continue to elicit reactions from operators and stakeholders in the economy, many see the committee’s retention of the monetary rates as a realistic approach to the economic recovery process. Olaseni Durojaiye reports

In line with expectations in many quarters, the Monetary Policy Committee of the Central Bank of Nigeria penultimate Tuesday left the benchmark interest rate, the monetary policy rate, and other key monetary indicators unchanged. At its 259th meeting in Abuja, the monetary regulator retained MPR at 14 per cent, cash reserves ratio at 22.5 per cent, liquidity ratio at 30 per cent, and the asymmetric window at +200 and -500 basis points around the MPR.

Reaction

Expectedly, the MPC decision has elicited mixed reactions among stakeholders. Some analysts are not altogether surprised at the decision, having predicted it would go that way. Many feel the economic situation in the country, within the context of global economic developments, require a hold back to strengthen the confidence building process.

Indeed, from the Q3 2017 Gross Domestic Product report released early last week, the aggregate growth in the economy was induced by the improved performance of the oil and gas sector. Agriculture also made significant contribution but other critical sectors, including construction, telecommunications, trade, and real estate, continued to lag. The banking and insurance industries did not fare any better.

According to a banker with a third generation bank, “I don’t blame the CBN for its decisions; in addition to the contribution by the oil and gas sector, is the multiplier effect of the exchange rate stability and the rate convergence that we have seen at the NAFEX and parallel market. The huge foreign capital inflow witnessed since Q2 2017 to date is attributable to the exchange rate stability. This inflow contributes significantly to the overall growth of the economy.”

But many operators in the real sector, who had for months hoped for a downward review of the MPR, have had their hopes dashed again. The real sector operators say they need the MPR reduction to ease access to capital and boost manufacturing.

President of the Manufacturers Association of Nigeria, Dr. Frank Jacobs, captured the frustrations and disappointment of operators in the sector in an interview with THISDAY, where he expressed his displeasure at the retained rates. Going into the meeting, which is the last for the year, the MPC was under pressure to reduce the benchmark lending rate, MPR.

Decisions

Chairman of the MPC, CBN Governor Godwin Emefiele, explained, “In arriving at its decision, the committee appraised potential policy options in terms of the balance of risks. The committee also took note of the gains made so far as a result of its earlier decisions, including the stability in the foreign exchange market and the moderate reduction in inflation and, thus, extensively deliberated the options regarding whether to hold, tighten or ease the policy stance.

“While tightening would strengthen the impact of monetary policy on inflation with complementary effects on capital inflows and exchange rate stability, it nevertheless could also potentially dampen the positive outlook for growth and financial stability. On the other hand, whereas loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it could aggravate upward trend in consumer prices and generate exchange rate pressures. The committee also feels that loosening would worsen the current account balance through increased importation. On the argument to hold, the committee believes that key variables have continued to evolve in line with the current stance of macroeconomic policy and should be allowed to fully manifest. Members noted that the developments in output and inflation, in particular, required effective close monitoring in order to gain clarity on the medium term optimal path of monetary policy.

“In consideration of the foregoing, the committee decided by a vote of eight to one to retain the Monetary Policy Rate at 14 per cent alongside all other policy parameters. One member voted to reduce the MPR by 100 basis points. Thus, the committee decided to (1) retain the MPR at 14 per cent; (2) Retain the CRR at 22.5 per cent; (3) Retain the Liquidity Ratio at 30 per cent; and (4) Retain the Asymmetric corridor at +200 and -500 basis points around the MPR.”

Emefiele further disclosed that the $3 billion Eurobond introduced to the international capital market penultimate week had been oversubscribed by $11 billion. He said this was an indication of international investors’ confidence in the Nigerian economy.

Justification

Analysts have justified the MPC’s decision. Speaking with THISDAY, an economist and research analyst with the Nigerian Economic Summit Group, Rotimi Oyelere, justified the rate retention. Oyelere based his position on the global economic outlook and the peculiarity of the country’s recovery process, which many analysts have dubbed fragile.

According to him, “The hold back is also justified looking at the widening revenue shortfalls in the 2017 budget, which necessitates the need for more borrowings to provide critical infrastructure and even pay emoluments of workers to strengthen aggregate demand. We need to look at all contributory factors to economic growth before making decisions that will erode the gains we are building.

“What we need at this time is massive investment across all economic sectors, private and public, that will make yields or return on investments attractive. More so, it will take some time before a reduction in policy rate will transmit into lower cost of commercial lending because prices are usually sticky downward. Hence, our options are limited.

“But it is sacrosanct to keep the growth momentum on-going, with the contribution of foreign capital inalienable at this time. I think the Q4 2017 GDP performance will foster more confidence in the entire economy, thereby encouraging investment not only in the financial sector, but also in the real sector. This will pave way for a downward lending rate.

“Even at that, efforts should be geared toward reducing the cost of doing business. What this implies is to give attention to economic factors, political dynamics and social forces that generally affect business and economic progress.”

According to Ademola, “You could argue that the monetary tightening policy of the MPC has resulted in a drop in inflation. Tightening has prevented inflation from going up. The MPC decisions over time have helped us exit recession. It has also brought stability to the foreign exchange markets as well as helped to attract capital so much that our foreign reserves are growing.”

Reduction

Sharing his thoughts on the MPR rate, Chairman of the Ogun State chapter of Manufacturers Association of Nigeria, Mr. Wale Adegbite, explained that inasmuch as manufacturers would prefer a reduction in the MPR rates, he understood the constraints on the CBN. Adegbite added, however, that manufacturers were hopeful of a gradual reduction of lending rates, starting with a reduction of the MPR.

He explained, “I think the manufacturers’ view has always been that interest rates should come down and that starts when the MPR comes down. So we look forward to a gradual reduction in MPR as soon as possible.

”However, there are two things involved. I wished that it was reduced but I can also understand why it was not reduced because the CBN is trying to protect the value of the nation’s currency in order to forestall inflation. I can understand, but we do hope that it comes down as soon as possible.”

However, Jacobs expressed dissatisfaction with the decisions to retain the MPR at 14 per cent and described it as “unfortunate”. He said, “We shouldn’t insist on inflation coming down before reducing interest rate.”

While arguing that it should be the other way round, he maintained, “It is not in the best interest of the manufacturing sector to continue to keep MPR rate at 14 per cent. As it is, money supply is very low, the decision will not encourage production activities, as most of our members can’t borrow at that high rate. In fact, many of our members are scaling down on capacity in order to remain operational. I had hoped that it will go down.”

Jacobs’ position aligns with that of Associate Professor of Economics at the University of Benin, Professor Chijioke Mgbame. According to Mgbame, “Retaining the MPR at 14 per cent is pure conservatism on the part of the policy makers considering that economic growth was still fragile.”

He says the way to go is to loosen the monetary policy to accelerate production in the economy.

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